TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 41

GPS 450 IMMEDIATE

CYPHER/CAT A

FM HONG KONG 921185Z

SECRET [ORWELL]

DECRET

CCADET

202

LAS

REF

TO IMMEDIATE FCO TELNO 854 OF 2 AUGUST. 1973

-REF.

679+68 PA

66

Zalm

PERSONAL FOR THE SECRETARY OF STATE FROM GOVERNOR.

I AM BECOMING THOROUGHLY WORRIED ABOUT THE WAY THINGS ARE

DRIFTING OVER THE STERLING AGREEMENTS. THOUGH WE HAVE GIVEN AMPLE WARNING I AM NOT SURE IF IT IS REALISED THAT IF WE DO NOT RECEIVE

CONCRETE PROPOSALS ABOUT THE AGREEMENTS WITHIN ABOUT A WEEK,

AT THE LATEST:-

A) THE HONG KONG GOVERNMENT WILL BE OBLIGED TO START SELLING FORWARD WITH A VIEW TO DIVERSIFYING. THE EVENTUAL TARGET WOULD BE TO HAVE 53 PER CENT OF THE GOVERNMENT'S OWN RESERVES IN STERLING. IF WE WERE ABLE TO ACHIEVE THIS THE SUM INVOLVED IN THE SWITCH WOULD BE IN THE

ORDER OF POUNDS STERLING 200 M.

B) THE BANKS WOULD DO THE SAME FOR A RATHER SMALLER AMOUNT:

C) ON 25 SEPTEMBER THE HONG KONG GOVERNMENT WILL PAY THE BANK APPROXIMATELY POUNDS STERLING 50 M. COMPENSATION UNDER OUR GUARANTEE SCHEME. THIS TOO WILL BE DIVERSIFIED OUT OF STERLING.

2.

I TRUST IT IS ALSO APPRECIATED THAT THE STERLING [GRP UNDEC]

BECOMES VIRTUALLY INOPERATIVE AS FROM 26 AUGUST BECAUSE OF THE 30 DAY RULE AND CANNOT BE INVOKED ANYWAY UNTIL STERLING FALLS WELL

BELOW DOLLARS 2.4.

3. WE HAVE HELD ON OUT OF LOYALTY AND IN THE EXPECTATION OF DEFINITE PROPOSALS FROM HMG, AND REQUIRED THE BANK TO DO SO TOO.

BECAUSE THE GUARANTEE ITSELF IS NOW OF SO LITTLE VALUE WE HAVE LONG PASSED THE POINT OF COMMERCIAL PRUDENCE.

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